Chapter 3. 2015 tax burdens
The 2015 tax burden results based on the eight model family types are presented in tables 3.1to 3.11a and figures 3.1to 3.6. The model family types vary by marital status, number of children and economic status: single taxpayers without children earning 67%, 100% and 167% of the average wage (AW); a single parent with two children earning 67% of the AW; a single earner couple at the AW level with two children; two-earner couples at 133% and 167% of the AW with two children; and a two-earner couple without children at 133% of the AW.
The chapter presents different measures for the average tax burdens (tax wedge, personal tax rate, net personal tax rate, personal income tax rate and employee social security contribution rate) and marginal rates (tax wedge and net personal tax rate). The results for two measures of tax progressivity are also considered: tax elasticity on gross earnings and labour costs.
Average tax burdens
table 3.1 and figure 3.1 show the average tax wedge (combined burden of income tax, employee and employer social security contributions) taking into account the amount of cash benefits each specific family-type is entitled to. Total levies due minus transfers received are expressed as a percentage of total labour costs, defined as gross wage plus employers’ social security contributions (including payroll taxes). In the case of a single person at the average wage level the wedge ranges from 7.0% (Chile) and 17.6% (New Zealand) to 49.5% (Austria) and 55.3% (Belgium). For a one-earner married couple with two children at the same wage level the wedge is lowest in New Zealand (4.9%) and Chile (7.0%) and highest in France (40.5%) and Belgium (40.4%). As stated in chapter 1, the wedge tends to be lower for a married couple with two-children at this wage level than for a single individual without children due to both receipt of cash benefits and/or more advantageous tax treatment. It is also interesting to note that the wedge for a single parent with two children earning 67% of the average wage level is negative in Australia (-1.4%), Canada (-5.9%), New Zealand (-14.4%) and Ireland (-18.6%). This is due to the amount of cash benefits received by these families plus any applicable non-wastable tax credits that exceed the sum of the total tax and social security contributions that are due.
table 3.2 and figure 3.2 present the combined burden of the personal income tax and employee social security contributions, expressed as a percentage of gross wage earnings (the corresponding measures for income tax and employee contributions separately are shown in tables 3.4and 3.5). A single person at the average wage level without children is liable to an average tax plus contributions burden of more than 40% only in Belgium (42.0%). The lowest average rates were in Chile (7.0%), Mexico (10.3%), Korea (13.8%), Israel (17.3%), Switzerland (17.4%), New Zealand (17.6%), Estonia (18.4%) and Ireland (19.7%).
table 3.3 shows the combined burden of income tax and employee social security contributions with the levies due being reduced by the entitlement to cash benefits for each family-type. figure 3.3 illustrates this burden for single individuals without children and one-earner married couples with two children at average earnings, respectively. Comparing tables 3.2to 3.3, the average tax rates for families with children (columns 4 -7) are lower in table 3.3 because most OECD countries support families with children through cash benefits.
A lower burden is also observed for a single individual without children at 67% of the average wage in Canada because of a cash transfer paid to mitigate the burden imposed by the federal consumption tax (further details can be found in the country chapter contained in part III of this Report). The same is true in Denmark for single taxpayers at 67% and 100% of the average wage and two-earner married couples without children at 133% of the average wage who receive a green check to compensate for increased environmental taxes.
For single parents with two children earning 67% of the average wage level, 27 countries provide cash benefits. In Ireland these represent 38.7% of income and they are at least 25% of income in 5 other countries: Canada (30.0%), New Zealand (29.3%), Slovenia (26.5%), Australia (25.9%) and Denmark (25.8%). 26 countries provide benefits for a one-earner married couple with two children earning the average wage level, although these are less generous relative to income, ranging up to 13.6% (Slovenia) and 13.5% (Luxembourg). The lower level of importance of cash benefits for the married couple can be attributed to three reasons: single parents may be eligible for more generous treatment; the benefits themselves may be fixed in absolute amount; or the benefits may be subject to income testing.
table 3.4 shows personal income tax due as a percentage of gross wage earnings. For single persons without children at the average wage (column 2) – the income tax burden varies between 0% (Chile) and 36.1% (Denmark). In most OECD member countries, at the average wage level, the income tax burden for one-earner married couples with two children is substantially lower than that faced by single persons (compare columns 2 and 5). These differences are clearly illustrated in figure 3.4. In nine OECD countries, the income tax burden faced by a one-earner married couple with two children is less than half that faced by a single individual (the Czech Republic, Germany, Luxembourg, Poland, Portugal, the Slovak Republic, Slovenia, Switzerland and the United States). In contrast, there is no difference in seven countries – Australia, Chile, Israel, Mexico, New Zealand, Sweden and the United Kingdom.
There are only three OECD member countries where a married average worker with 2 children has a negative personal income tax burden. This is due to the presence of non‐wastable tax credits, whereby credits are paid in excess of the taxes otherwise due. This results in tax burdens of -4.7% in the Czech Republic, -2.0% in the Slovak Republic and -1.5% in Poland. Similarly, in seven countries – the Czech Republic, Germany, Poland, the Slovak Republic, Spain, the United Kingdom and the United States – single parents with two children earning 67% of the average wage show a negative tax burden. In four other countries – Chile, Israel, Korea and Slovenia – this family-type pays no income tax.
A comparison of columns 5 and 6 in table 3.4 demonstrates that if the previously non‐employed spouse finds a job which pays 33% of the average wage level, the income tax burden of the family (now expressed as 133% of the average wage level) is slightly higher in seventeen countries, the largest differences being in the Czech Republic (7.0 percentage points) with Germany (5.7 percentage points) and the Slovak Republic (5.6 percentage points). At the same time, the income tax burden is lower in fifteen countries, the largest differences being in Finland (-4.6 percentage points), Australia and Mexico (both -4.4 percentage points). There is no impact on the tax burden in Chile and France.
An important consideration in the design of an income tax is the level of progressivity – the rate at which the income tax burden increases with income. A comparison of columns 1 to 3 in table 3.4 provides an insight into the levels of progressivity in the income tax systems of OECD countries. Comparing the income tax burden of single individuals at the average wage level with their counterparts at 167% of the average (columns 2 and 3), the lower paid worker faces a lower tax burden in all countries except in Hungary. There, a flat tax rate is applied on labour income and all households without children pay the same percentage of income tax. The same is true for single individuals at 67% of the average wage level compared with the average with an additional exception in Chile where these workers do not pay income tax. Finally the burden faced by single individuals at 67% of the average wage level represents one-quarter or less of the burden faced by their counterparts at 167% in only five OECD countries: Chile (0%), Mexico (15%), Greece (17%), Korea (18%) and the Netherlands (25%).
The addition of social security contributions to the average tax rate reduces this progressivity as well as the proportional fiscal savings enjoyed by families (compare table 3.2 and table 3.4). The OECD personal average tax burden of single individuals at 67% of the average wage level is only 32% lower than their counterparts at 167% compared to the OECD average savings of 50% for personal income taxes alone. The average fiscal savings observed for one-earner married couples with two children at the average wage level relative to single individuals falls from 37% to 20%. These lower figures reflect that there is little variation between social security contribution rates across family types, as shown in table 3.5.
table 3.5 shows employee social security contributions as a percentage of gross wage earnings. For a single worker without children at the average wage level (column 2) the contribution rate varies between zero (Australia, Denmark and New Zealand) and 22.1% (Slovenia). Australia, Denmark and New Zealand do not levy any employee social security contributions paid to general government and there are four other countries with very low rates – Iceland (0.4%), Mexico (1.4%) and Estonia (1.6%). Social security contributions are usually levied at a flat rate on all earnings, i.e. without any exempt threshold. In a number of OECD member countries a ceiling applies. However, this ”capping” provision usually applies to wage levels higher than 167% of the average wage. These rate structures reflect a roughly constant average burden of employee social security contributions for most countries between 33% and 167% of average wage earnings. Some examples of a constant proportional burden for employee social security contributions for over the eight model family types, are (in decreasing order) Slovenia (22.1%), Hungary (18.5%), Poland (17.8%), Greece (15.5%), Turkey (15.0%), the Czech Republic and Portugal (11.0%), Norway (8.2%), the United States (7.7%), Chile (7.0%) and Estonia (1.6%).
In addition, at the average wage level only Germany and the Netherlands impose different burden of social security contributions on employees; according to their family status (see figure 3.5).
Marginal tax burdens
table 3.6 and figure 3.6 show the percentage of the rise in labour costs that is deducted through the personal income tax and both employee and employer (including payroll taxes) social security contributions for a marginal increase in labour costs. This is the marginal wedge. In most cases, the marginal tax wedge absorbs 25%-55% of a rise in labour costs for single individuals without children at the average wage level. However, in eight OECD countries these individuals face higher marginal wedges – Belgium (66.3%), Austria (60.5%), Germany (60.2%), France (59.3%), Italy (56.0%), Ireland (55.8%), Finland and Luxembourg (both 55.5%). Mexico (25.2%) and Chile (7.0%) have the lowest marginal tax rates.
In twenty two OECD member countries, the marginal tax wedge for one-earner married couples at average earnings with 2 children is either the same or within 5 percentage points as that for single persons at average wage earnings with no children. The marginal wedge is more than 5 percentage points lower for the one-earner married couples in eight countries: Ireland (18.1 percentage points), Luxembourg (16.1 percentage points), France (15.8 percentage points), Portugal (14.1 percentage points), Switzerland (9.7 percentage points), the United States (9.3 percentage points), Germany (7.9 percentage points) and Slovenia (7.4 percentage points). In contrast, in New Zealand (21.2 percentage points), Canada (20.9 percentage points), Australia (18.9 percentage points) and Iceland (8.9 percentage points), the marginal rate for one-earner married couples with two children is more than 5 percentage points higher than it is for single workers with no children.
table 3.7 and figure 3.7 show the incremental change to personal income tax and employee social security contributions less cash benefits when gross wage earnings rise marginally. As in the case of the tax wedge, in most cases personal income tax and employee social security contributions absorb 25% - 55% of a worker’s pay rise for single individuals without children at the average wage level. The marginal tax rate is lower than 25% only in Chile (7.0%), Mexico (19.5%), Estonia (21.3%) and Korea (21.9%).
In twenty one OECD member countries, the net marginal personal tax rate for one‐earner married couples with two children at the average wage level is either the same or within five percentage points as that for single persons with no children. The marginal rate is more than 5 percentage points lower for the one-earner married couples in nine countries: France (21.8 percentage points), Ireland (20.0 percentage points), Luxembourg (18.1 percentage points), Portugal (17.5 percentage points), Switzerland (10.4 percentage points), the United States (10.0 percentage points), Germany (9.4 percentage points), Slovenia (8.5 percentage points) and Spain (5.6 percentage points). In contrast, in Canada (22.9 percentage points), New Zealand (21.2 percentage points), Australia (20.0 percentage points) and Iceland (9.6 percentage points), the marginal rate for one-earner married couples with two children is more than 5 percentage points higher than it is for single persons with no children. These higher marginal rates arise because of the phase out of income-tested tax reliefs and/or cash transfers. When an income-tested measure is being phased out, the reduction in the relief or benefit compounds the increase in the tax otherwise payable. These programmes are set out in greater detail in the relevant country chapters, in part III of the Report.
table 3.8 shows the percentage increase in net income when gross wage earnings increase by 1 currency unit, i.e. the elasticity of after-tax income.1 Under a proportional tax system, net income would increase by the same percentage as the increase in gross earnings, in which case the elasticity is equal to 1. The elasticity is measured as 0.8 when an increase of gross wage by 1 currency unit leads to a corresponding rise of net take-home pay of only 0.8 of a unit. The more progressive the system is – at the income level considered – the lower this elasticity will be. In the case, for example, of the one-earner married households with two children at the average wage level, column 5 of table 3.8 shows that of all OECD member countries Canada (0.46), Australia (0.47), New Zealand (0.51) and Belgium (0.58) have, on this measure, the most progressive systems of income tax plus employee social security contributions taking into account tax provisions and cash transfers for children at this income level. In contrast, Chile (1.00), France (0.95), Turkey (0.91) and Mexico (0.90) either implement or are close to a proportional system of income tax plus employee social security contributions – at least for this family type.
It is interesting to note that the elasticity exceeds one for a single individual at 167% of the average earnings in Austria (1.03), indicating that the income tax system at this point in the income scale is regressive. In other words, a percentage increase in gross pay leads to an increase in net income in excess of the percentage increase in gross wage earnings.
table 3.9 provides a different elasticity measure: the percentage increase in net income when labour costs (i.e. gross wage earnings plus employer social security contributions and payroll taxes) rise by 1 currency unit.2 In this case taxes and social security contributions paid by employers are also part of the analysis. In most OECD member countries the value of this elasticity lies between 0.5 and 0.97 for the eight selected family-types. This elasticity is below 0.5 for single parents earning 67% of the average wage level in Australia (0.41), Canada (0.37), Ireland (0.27) and the United Kingdom (0.25), for one-earner married households at the average wage level with two children in Australia and Canada (both 0.47) and for two-earner married households where one spouse earns the average wage and the other 33% of it with two children in Australia (0.38). In contrast, the elasticity is between 0.97 and 1.0 for some family types in Chile, Estonia, Hungary, Japan, Korea, Mexico and Poland. It is interesting to mention that under this elasticity measure the income tax system is regressive for a single individual at 167% of average earnings in Spain (1.11), Germany (1.14) and Austria (1.21).
table 3.10a sets out figures for gross wage earnings and net income for the eight family‐types after all amounts have been converted into U.S. dollars with the same purchasing power. Single workers with the average wage take home (see table 3.10a, column 4) over USD 37 000 in eight countries: Switzerland (USD 57 756), Norway (USD 43 104), the Netherlands (USD 42 650), Australia (USD 42 456), Luxembourg (USD 42 134), Korea (USD 40 748), the United Kingdom (USD 39 381) and the United States (USD 37 899). The corresponding lowest levels were in Mexico (USD 11 539), Hungary (USD 15 922) and the Slovak Republic (USD 16 748). In the case of a one-earner married couple with two children at the average earnings level, families take home over USD 50 000 in Luxembourg and Switzerland; with the lowest level again being in Mexico. It is interesting to observe that with the exceptions of Chile and Mexico, the one-earner married couple takes home more than the single individual at the average wage due to the favourable tax treatment of this family and/or the cash transfers to which they are entitled.
table 3.11a shows the corresponding figures to table 3.10a for labour costs and net income. So the ’net’ columns in tables 3.10ato 3.11a are identical. Usually, labour costs are found to be much higher than gross wages, because any employer social security contributions (including payroll taxes) are now taken into account. If measured in US dollars with equal purchasing power, labour costs for single workers earning the average wage level are the highest in Switzerland (USD 74 255) and Belgium (USD 74 137), and the lowest in Mexico (USD 14 375) and Chile (USD 19 338). It is interesting to note that the annual labour costs are equal to the annual gross wage in Chile and New Zealand. In those countries neither compulsory employer social security contributions nor payroll taxes are levied on wages. However, employers in Chile are subject to non-tax compulsory payments related notably to pension schemes.
Notes
← 1. The reported elasticities in table 3.8 are calculated as (100-METR)/(100-AETR), where METR is the marginal rate of income tax plus employee social security contributions less cash benefits reported in table 3.7 and AETR is the average rate plus employee social security contributions less cash benefits reported in table 3.3.
← 2. The reported elasticities in table 3.9 are calculated as (100-METR)/(100-AETR), where METR is the marginal rate of income tax plus employee and employer social security contributions less cash benefits reported in table 3.6 and AETR is the average rate plus employee and employer social security contributions less cash benefits reported in table 3.1.